Magazine

New York: A Day Late and $4 Billion Short

February 03, 2002

Michael R. Bloomberg proved his savvy by building a multibillion-dollar financial information business amidst the smartest people on Wall Street. That feat earned him the luxury of spending $72 million to be elected mayor of New York City. He campaigned on the strength of his financial experience, saying it made him the most qualified to manage the city through a recession and one of its worst budget problems in more than two decades.

That campaign boast will now be put to the test. For Bloomberg, the problems of running the aging metropolis may prove more difficult than any management and financial challenge he ever faced at Bloomberg LP. Although still in his first month of office, Bloomberg has already learned one hard lesson in his crash course on city finance: Campaign vows to foreswear new debt will have to be broken. "The challenge he has financially is incredible," says former three-term Mayor Edward I. Koch.

For starters, New York City's budget for Bloomberg's first full fiscal year is short by $4 billion of the $27 billion of planned city spending. While the city's total budget, including state and federal programs, comes to $40 billion, the gap in Bloomberg's portion is 15%. That's the biggest percentage shortfall for any new mayor since the city's fiscal crisis in 1976, when it arranged emergency borrowing for 19% of its annual expenses. What's more, tax revenues are expected to fall by 5.7% in the current fiscal year.

At the same time, debt-service costs for capital spending are now consuming one-sixth of tax revenues. City debt for each New Yorker is up to $4,600, the highest per capita of 15 major U.S. cities. Of course, the terrorist destruction of the World Trade Center--for which the city expects the federal government to pay billions--aggravated the economic woes. But the problem predates September 11 and its psychological scars. Indeed, it's the national recession and bear market on Wall Street, a vital source of revenue, that have the greater impact. Even if the economy begins growing again this summer, as some economists are projecting, revenue won't come back to 2000 levels by 2003, according to the city's Independent Budget Office (IBO).

The mayor has until Feb. 14 to present his budget for the fiscal year beginning on July 1. The deadline has already been extended from the end of January by the City Council to give Bloomberg more time to sort out the hard steps he has to take, primarily cutting payroll and stalling capital spending. Bloomberg is required by law, passed in the aftermath of the 1970s' fiscal crisis, to balance spending and revenue by the end of each fiscal year. Former mayors Abraham Beame and Koch together had six years to close the 19% gap from the fiscal crisis. Bloomberg should be given an extra year "to spread the pain," says Koch.

The coming $4 billion shortfall casts a shadow on former Mayor Rudolph W. Giuliani's reputation for fiscal prudence. True, in his first term, 1994-98, Giuliani cut payroll and reduced spending, adjusted for inflation, by 1.8%. And he started pruning employment in his final months and set out a gap-closing program of $1.3 billion. That move means he's leaving Bloomberg a balanced budget, plus $500 million toward next year, according to the IBO. But two-thirds of his measures won't carry over into Bloomberg's first fiscal year. What's more, in Giuliani's second term, real spending rose 11% over the eight years, according to the Citizens Budget Commission (CBC), a private research group--a figure Giuliani's budget director, Adam L. Barsky, calls an "exaggeration." And the workforce increased to 250,000, some 6,600 more employees than when he took office. While the hiring seems justified--teachers and police were added as the population grew--the payroll is Bloomberg's burden now.

If he chooses, Bloomberg might be able to find about $1 billion of wiggle room in the budget, including some refinancing and other maneuvers. And he is pursuing productivity gains from work-rule changes in labor negotiations this year with teachers, cops, and other municipal workers. But those gains are mostly for the future. Right now, he has to find $3 billion in payroll cuts, which he is starting, or in taxes, which, he said at his inauguration, "we cannot raise."

A huge constraint is the city's $41 billion debt, money borrowed to build schools, housing, and bridges. Debt service this year will eat up about 17.5% of city tax revenues. That's up sharply from 11.6% in 1990. Little can be done to reduce the payments significantly--the state constitution and federal law, intended to prevent reckless tax-exempt borrowing, severely limit refinancing.

In fact, Bloomberg will have trouble keeping the debt from getting heavier. Before September 11, the city committed to $6 billion in capital spending, up 60% from 2000, according to the city comptroller. Giuliani planned for even more spending--as much as $14.1 billion over the next two years. That would drive debt to more than $50 billion in 2004, according to the comptroller. Much of the debt buildup was to reverse the neglect of the city's schools and to pay for federally mandated water-filtration plants. But Bloomberg has no choice but to start paring back, says Charles Brecher, research director at CBC.

Will Bloomberg insist on the kind of draconian cuts he might make in his privately held financial-data empire? Four months before he took office, the candidate criticized budget gimmicks and swelling city borrowing. He complained that the city had "circumvented" a debt limit by creating a new bonding entity, the Transitional Finance Authority (TFA). He also slammed "one-shot revenues, especially those that come from the sale of city property," to balance the budget.

But by October, his tone was already softening. Instead of reining in debt, he said in a position paper, the city should borrow more through the TFA and create a new entity that would issue debt to finance a subway extension to the Jacob Javitz Convention Center. And instead of lamenting the "one-shots," he recommended the city think about selling its buildings to private investors and lease them back.

Bloomberg spokesman Jordan Barowitz says the impact of September 11 forced the new mayor to become more flexible. Now, says Barowitz, "everything could be part of the solution." So far, Bloomberg has asked city departments to propose 20% cuts in operating expenses and 25% cuts in capital-spending plans. And he has backed away from Giuliani's push for new sports stadiums.

Giving in on fiscal absolutes may be part of the education of any new mayor. After all, what good is a harshly balanced budget if it stains the city with a costly reputation for dirty streets, iffy transit, and crumbling schools? But such rationales can also become the start of a slippery slope of spending. By David Henry in New York